• medium and large companies that comply with the criteria set by the Law on Annual Financial Statements and Consolidated Financial Statements; and
• parent companies of a group that prepare a consolidated annual group report.

These must file an annual report and consolidated annual report (if prepared) with the SRS within seven months of the end of a company’s reporting year.

Due to COVID-19 pandemic, also this year the general deadline for preparing and filing annual reports for 2021 can be prolonged to 31 July 2022 (i.e. three months later than under the ordinary procedure and this principle of prolonging the deadline for three months also applies to the companies relying on above mentioned seven months period). There is no need to arrange this prolongation with the SRS.

Requirements in addition to the annual report

In addition to the annual report and auditor’s statement on the annual report (for companies that meet the criteria listed in the Law on Annual Financial Statements and Consolidated Financial Statements, as well as companies whose articles of association or shareholders’ meeting require the annual report to be reviewed by an auditor), the Commercial Law requires a board proposal to be prepared before approval of the annual report on distribution of profit (or in the case of losses: a proposal on improving the company’s financial status) and, if the company has a council, a report from the council on the annual report. Moreover, under the Law on Groups of Companies, dependent companies must prepare a statement of dependence to be filed with the Commercial Register, unless a group agreement has been concluded.

The annual meeting of shareholders to approve the annual report must be held no later than 31 July. A notice convening the meeting must be sent to shareholders of private limited liability companies at least two weeks before the meeting, while for joint-stock companies the deadline is at least 30 days before the meeting. Along with the notice convening the meeting, the following must be sent to shareholders:

• the annual report,
• a statement of dependence,
• an auditor’s statement,
• a report from the council and
• a board proposal.

Joint-stock companies need not append these documents to the notice convening the meeting as long as the notice contains information about the place and time where the shareholder may access them at the registered address of the company. However, considering that at the moment due to the COVID-19 pandemic Latvia is encouraging social distancing, it would be advisable to post (mail) the documents to shareholders.

Please note that the Commercial Law allows the board to convene a shareholders’ meeting, enabling the shareholders to participate and vote at the meeting by electronic means of communication.

The annual report must be filed only with the SRS, along with the details of the approval of the annual report by the shareholders’ meeting.

The annual report must be signed not only by the board or an authorised member of the board but also by the company’s in-house or outsourced accountant (criteria are listed in the Law on Annual Financial Statements and Consolidated Financial Statements and the co-signing duty of the accountant applies to the financial statements and consolidated financial statements).

Noncompliance with the requirement to draft a statement of dependence under the Law on Groups of Companies formally exposes the board members to the risk that their liability is evaluated. This is especially important for companies which are entering into agreements with related parties and which have several shareholders.

What to consider when convening a shareholders’ meeting

By sending invitations to shareholders’ meetings, it is important to indicate a procedure whereby the shareholder can use his/her statutory rights, as well as deadlines:

• to vote before the shareholders’ meeting
• to participate and vote at the shareholders’ meeting by electronic means of communication

It is advisable supplementing the invitation with a voting ballot, accompanied by instructions on how to sign and return it to the company. In this case, it is important to clearly state the requirements for identification of the shareholders. The shareholder sends the vote to the company, keeping in mind the shipment time: the company should receive the voting ballot at least one day before the meeting.

To ensure shareholders’ ability to participate and vote at the meeting with the help of electronic means of communication, the board has to stipulate how it intends to identify the shareholders.

If you would like to know more about the annual report or other obligations companies need to meet in Latvia, please visit the homepage of Sorainen, the exclusive partner of WTS Global in Latvia.

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New tax payment deadline and payment details

In order to ease administration for Latvian companies, since 1 January 2021, all tax payments, including VAT, must be paid to a new unified tax account of the Latvian tax authorities (State Revenue Service, SRS). According to the new Latvian VAT rules, the payment deadline for all regular domestic taxes administered by the SRS is the 23rd day of the month. It means that since 1 January 2021, the new payment deadline also for VAT (which is calculated by submitting regular VAT returns) is the 23rd day of the month following the reporting period (it was previously the 20th day of the following month). When submitting a VAT payment notification (e.g. for purchasing a new means of transport from another EU country or for VAT payable to the budget after deregistration from the Latvian VAT register), VAT must be paid within three working days.

Regarding the tax payments administered by the Latvian customs authorities (import duty, import VAT and excise duty), the existing budget accounts still have to be used. The respective payments to the unified tax account will have to be made only as of 2023.

Input VAT refunds

According to the new VAT rules also a new overpayment refund procedure has to be applied. In the event of an excess of input VAT over output VAT, a refund of VAT must be made by the tax authorities to a taxpayer within 30 days after filing a VAT return. Only in certain cases do the tax authorities have the right to delay the refund of the overpaid VAT. (For example in cases of tax audit or request for additional information).

Reduced VAT rates

The period of application of the reduced VAT rate of 5% for the supply of certain types of fresh fruit, berries and vegetables, including washed, peeled and packaged types, uncooked or otherwise prepared (for example, frozen, salted, dried) is extended until 31 December 2023. Previously, it was set until 31 December 2020.

Pursuant to the new Latvian VAT rules, since 1 January 2021, a reduced rate of 0% VAT applies to the supply of the COVID-19 vaccine, registered in accordance with pharmaceutical regulations and in vitro tests recognised in the European Union and to the supply of services closely related to that vaccine and tests. The provision will be valid until 31 December 2022.

New VAT rules on e-commerce

Latvia has implemented new VAT rules of e-commerce, in accordance with the amendments to Directive 2006/112/EC and will start to apply them as of 1 July 2021. The new rules also include that import VAT will be due on all low-value goods imported into Latvia from non-EU countries (currently, the importation of goods for personal use with a value not exceeding EUR 22 is exempt from VAT).

If you would like to know more about the new VAT rules in Latvia, please visit the homepage of Sorainen, the exclusive partner of WTS Global in Latvia.

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Transposition of the DAC6 Directive into Latvian tax laws

On 25 June 2018 Council Directive (EU) 2018/822 on administrative cooperation in the field of taxation, known as the DAC6 Directive, came into force. Member States were obliged to transpose the EU Directive into their laws by 31 December 2019 and apply the provisions complying with it from 1 July 2020.

Cabinet Regulation No 210 aims to implement the DAC6 Directive into Latvian tax laws. It was published on 17 April 2020 and will be effective from 1 July 2020, however, reports will cover arrangements retrospectively too. This new element of Latvian tax laws imposes an obligation on any company to notify the State Revenue Service of Latvia (SRS) if the company has received any tax advice on a cross-border scheme (i.e. a transaction or company structure), or has introduced such a scheme since 25 June 2018. But what exactly has to be notified? Let’s take a look at some practical examples.

Notification indicators and special cases

The SRS has to be notified about a cross-border scheme if at least one of the notification indicators applies. These indicators have two categories:

• one of the main benefits of a transaction or structure is taxes,
• a scheme that has to be notified irrespective of whether one of the main benefits of a transaction or structure is taxes.

Among the indicators regarding one of the main benefits being taxes, the EU especially highlights the desire to tackle consultants who have ready-made, standard solutions/schemes to hand and who sell them “in bulk”. An indicator that would trigger notification also includes a consultant’s “success fee” that depends on the company’s tax savings.

Indicators where it is not important whether tax is one of the main advantages would be cross-border payments between related companies, where, for example, the payment is completely exempt from taxes in the country or territory where the payee is a tax resident, or payment is subject to a tax benefit regime in a country or territory where the payee is a tax resident. So related companies should be particularly careful about the notification obligation!

For example, Germany applies a more detailed interpretation: the distribution of dividends without withholding tax constitutes a cross-border scheme that needs to be notified if these dividends are exempt from taxes in the payee’s country. Latvia, in turn, does not have a withholding tax on dividends paid in Latvia (except payments to offshore). So many companies will have to check whether their dividends are taxed or remain exempt in the payee’s country, and take a decision about notifying the SRS.

They should start with an algorithm to determine whether the transaction or structure comprises a cross-border scheme according to the definition. If so, they need to check whether the transaction or structure reveals any of the indicators that trigger the notification obligation under Section 3 of the new Cabinet Regulations. Some of the indicators may require notification even if the company has not gained any tax benefit from the scheme.

Amendments to the Cabinet Regulations on application of the CIT Law

Another amendment to the Latvian tax laws affects the CIT Law. On 5 May 2020, Cabinet Regulations were adopted stipulating:

• a report form and a procedure to complete it with regard to income gained by a non-resident in Latvia from leasing or renting immovable property;
• documents to be submitted by the non-resident together with the report.

Currently, the Regulations provide an option to deduct special designated core company expenses that can be linked to a permanent establishment in Latvia, in the amount of 10%, unless they are included in the product prime price, i.e. indirect costs, such as a share of the salary paid to the accountant or such like.

The amendments to Latvian tax laws described above have been supplemented by an explanation that assets which are included in the share capital of the acquiring company as a result of reorganisation comprise deferred CIT until the share capital is decreased. They specify the same tax declaration and payment period for other taxpayers (20^th of the next month) for taxpayers carrying out a liquidation or reorganisation.

Click here if you want to read the original article on the homepage of Sorainen, the exclusive partner of WTS Global in Latvia!

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In three weeks, the first year will have passed since the General Data Protection Regulation of the EU came into force. It means among others that companies had to arrange documentation and data processing procedures in line with GDPR requirements by this date.

What lessons should we learn from mistakes made by others?

Preparing for the General Data Protection Regulation was partly driven by the heavy fines, which have been a hot topic of discussion, not least the maximum fine of up to EUR 20 million or up to 4% of turnover in the case of a company. Have concerns about these huge fines been reasonable? Several EU Member States have already reported on the first fines imposed.

Assessment of these fines and related violations can help eliminate remaining deficiencies in data processing procedures. With that in mind, we have collected the main conclusions from these decisions. The conclusions are especially dedicated for companies operating in Latvia but can be useful for data controllers in other countries too.

Excessive video surveillance: violation of the General Data Protection Regulation in Austria

Country: Austria
Fine: EUR 4,800

A fine was imposed on a sports café that kept the public area (pavements, car park, café entrance) under video surveillance. The section of the public area covered by video surveillance was not proportional to the purpose of data processing. The section under video surveillance did not display any notifications about video surveillance. The storage term for keeping video records was not observed in compliance with Austrian national regulatory enactments (the GDPR allows each Member State to determine this term individually).

What can we learn from this situation?

Video cameras. A controller of video surveillance must have clearly defined data processing purposes (for example, monitoring the production process, security, crime prevention, access control, and others). Camera coverage must be proportional to the set purpose.

Signs about video surveillance. The controller must inform data subjects about data processing by providing all the information listed in Article 13 of the General Data Protection Regulation about data processing, its term, data subjects’ rights, and so on. In the case of video surveillance, the information must be provided before anyone enters the area covered by video surveillance. To achieve this target, information signs serve pretty well. In Latvia, the legislator allows controllers to choose whether to use a video surveillance sign for notification or some other means, for example, a poster with all the required information. Under the Personal Data Processing Law, a video surveillance sign must provide at least the controller’s name, contact information, purpose of data processing, and an indication where to find other information listed in Article 13 of the General Data Protection Regulation (eg, a home page to access or a phone number to call).

“Dead souls” in the data processing system: violation of the General Data Protection Regulation in Portugal

Country: Portugal
Fine: EUR 200,000

A fine has been imposed on a hospital for non-compliance with the fundamental principles of data processing, failure to apply appropriate technical and organisational measures and inability to ensure observance of the principles of information security. The hospital did not have documentation on granting user rights to the users of its data processing system. The system had recorded 985 active doctor profiles, although the actual number of doctors employed was as small as 296. Nine technical employees were granted as broad access rights to patient data as were medical personnel. In this case, imposition of a heavy fine was also affected by the fact that the controller processed medical data that are considered as an increased risk data category.

 What can we learn from this situation?

Recording. Accountability is one of the fundamental principles of the General Data Protection Regulation. This principle means that the controller must ensure the option to verify how the information system works, how access rights are granted and denied, and how GDPR principles are ensured.

Deactivation of user profiles. Controllers sometimes violate the rules by failing to deactivate profiles of ex-employees. So, when ending employment, employers must always remember to deactivate former users’ accounts immediately afterwards.

Minimising. Another significant principle of the General Data Protection Regulation is data minimisation, namely, processing is “limited to what is necessary”. So, upon configuring rights to access the data base, it is important that extensive rights to access, enter, correct, and delete information are granted only to employees whose working duties include these operations.

Click here if you want to read further cases and the full article on the homepage of Sorainen, the exclusive partner of WTS Global in Latvia!

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In autumn 2017 Latvian government started working on amendments in the Latvian Taxes and Duties Act with the aim of introducing the recommendations with respect to TP documentation in Latvia stemming from the BEPS project outcomes. Currently the draft law amendments are approved by the Latvian parliament in the first round.

It is planned to review the draft law amendments in the second round on 4 September 2018, and after the third round the draft law will come into force. Taxpayers will be obliged to prepare master and local files as from financial year starting in 2018.

In addition, the tax law amendments should also introduce other changes, e.g. the definition of related party, deadlines for the submission of TP documentation, penalties for inaccurate TP documentation in Latvia, etc. The country-by-country reporting requirements in Latvian tax law were introduced on 4 July 2017.

Content of the TP documentation in Latvia

Currently Latvian tax law defines the content of the TP documentation. After amendments are introduced, qualifying taxpayers will be obliged to prepare master file and/or local file in line with the content set by the OECD Guidelines. This change will bring clarity and will result in a less administrative burden for multinational enterprises.

Although the Latvian State Revenue Service (SRS) generally request taxpayers to submit any tax related information in Latvian, the master file may be submitted in English. However, the SRS has rights to ask for the translation that has to be submitted within 1 month after the request from the SRS. The local file should be prepared in Latvian.

The obligation to prepare and submit master and local file

Essential novelty is the new thresholds set to determine the TP documentation preparation and submission obligations. Currently article 15.2 paragraph 2 in the Taxes and Duties Act states that TP documentation in Latvia must be prepared by the taxpayer if its annual turnover exceeds EUR 1.43 million, and related-party transactions exceed EUR 14,300 annually.

In accordance with the new amendments, the thresholds will be increased materially, as depicted in the table below:

The TP documentation in Latvia must be revised and updated every year. However, if the situation of the company does not change significantly it is allowed to update only certain sections of the documentation and financial data used in the analysis. The whole TP documentation must be revised once in 3 years. Additionally, the analysis is not required for transactions below EUR 20,000.

The SRS will be allowed to request TP documentation in Latvia to analyse risks and to provide consultations

Interesting novelty in the draft law is an article that allows the SRS to request from the taxpayer TP documentation with the aim to „verify the risks of TP adjustments, to advise on possible TP adjustment risks, to offer voluntary adjustment of the corporate income tax (CIT) return or to invite taxpayer to initiate the advance agreement procedure (APA)“. In this case the TP documentation in Latvia should be submitted to the SRS within 90 days from the day of the request (with a possibility to extended the deadline by 30 days).

New penalties regarding TP documentation in Latvia

In case a taxpayer does not comply with the TP documentation submission and if it significantly violates the TP documentation preparation rules, the SRS will be allowed to apply penalty up to 1% form the related party transaction value (for which the taxpayer is obligated to prepare the TP documentation), but no more than EUR 100,000. As a significant violation qualifies incomplete TP documentation (requested information is not included in the TP documentation) meaning that it is not possible to make a conclusion whether the agreed price is arm’s length.

Adjusting CIT returns and APA

The draft law provides that taxpayers will be allowed to make adjustments in the CIT declaration for 5 years (currently 3 years), if adjustments results from the TP adjustments. Such amendment is introduced to align it with the TP audit period, namely, TP may be audited for 5 years.

Starting from 1 January 2019 it will be possible to conclude the APA not only for the planned related-party transactions, but also for transactions already carried out during 5 previous years.

Considering that TP audits can be quite complicated, the amendments eliminate any deadlines for making decision in TP audits. After the changes enter into force, TP audits would continue for indefinite period.

Transactions with Latvian related parties

Before analysing whether the company has to prepare the TP documentation in Latvia it is necessary to understand whether the transaction partner qualifies as a related party. Related party definition is included in article 1 paragraph 18 of the Taxes and Duties Act. The main change is that local companies which are associated with participation of less than 50% (currently 90% and certain companies using specific tax reliefs qualify as related parties) will not be considered as related parties.

Summary

The new tax law amendments bring major changes for taxpayers having transactions with related parties. The content of the TP documentation and the obligations to prepare and submit the TP documentation in Latvia will change significantly. Thereby many taxpayers will have to reconsider their TP documentation practices and plan regular TP documentation updates.

If you would like to know more about the TP documentation in Latvia, please visit the homepage of Sorainen, the Latvian partner firm of WTS Global.

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